by on Thursday, January 3rd, 2013 | Comments Off on The Shadow Inventory: Helping Housing to Recover?

Throughout history humans have learned to be wary of what lurks in the shadows, waiting to strike. The same principle may hold true as the housing market struggles to recover from the devastating subprime mortgage meltdown of a few years ago. Although statistics based on a variety of markers appear to point toward a slow upswing in the housing industry, the “shadow inventory’ of distressed homes not yet on the market may be affecting the data—and the behavior of home buyers and sellers.

The term shadow inventory is defined differently by different organizations, which use differing criteria to determine what properties are included. But in general, it refers to homes already in foreclosure, with delinquent mortgages, or owned by lenders, but not yet placed up for sale.

Because of the massive numbers of mortgage defaults around 2008, many foreclosure cases ended up stalled in a logjam of cases needing to be processed through the courts. The homes involved trickled onto the market in fits and starts as cases began to move again – sometimes two and three years after the initial foreclosure action was initiated.

These bursts of foreclosure activity n various markets around the country created some conflicting data for those tracking the housing recovery. On the one hand, since fewer foreclosures were hitting the market, it appeared that the crisis had resolved and the housing markets were headed toward recovery. But then the number would spike again as a group of newly cleared cases hit the listings.

Other factors affected the numbers, too. The government and even some private lenders instituted more mortgage debt relief programs and loosened regulations governing foreclosure and short sales, numerous struggling homeowners took the short sale option rather than allowing the property to go into full foreclosure – a phenomenon that reduced the number of foreclosures entering the housing market.

But the continued existence of the shadow inventory still concerns real estate professionals and housing industry trend watchers. Although overall, the number of homes in the shadow inventory decreased by 1.2 million properties in just the first six months of 2012, over 5 million homes remained in the shadows in the remaining months of that year.

What does this mean for Jason Hartman-style real estate investors? Many potential investment properties remain unresolved and off the market. The number of homes in the shadow inventory is constantly changing, as cases are resolved or sellers make the decision to sell or not, depending on how secure, or vulnerable, they feel about the state of the market overall. This may make investment planning difficult.

But, experts believe, the preservation of the mortgage interest tax deductions in the: fiscal cliff: deal of New Years' Day may affect homeowners’ willingness to sell their properties The continued rise in short sales, too, reflect homeowners’ attempts to avoid foreclosure. But for investors looking for new opportunities in an environment of continued low interest rates and rising home prices, the shadow inventory lurking in the background of the housing market may be worth keeping in mind. (Top image: Flickr/JCooper)